Investors Ignore Frightful Geopolitics

When the former Soviet Union collapsed almost 25 years ago, most global strategic
forecasters assumed that the U.S. would adapt pragmatically to her new status
of sole world superpower. Instead she has pursued a variety of misguided nation-building
adventures and has largely shrunk from her primary responsibility of neutralizing
the ambitions of petty dictators around the world. From this perspective, America's
multi-generational expenditures on military personnel and equipment has become
more of a stealth economic stimulus program rather than an insurance policy
for global stability.

The massive failures of U.S. intervention in Vietnam, Iraq and Afghanistan
have caused the Western Allies to fear the future deployment of troops. Instead
they have resorted to preserving an impression of strength by pressing their
agenda with minor nations like Serbia, Libya and Syria through a combination
of endless diplomacy and relatively riskless air power. In doing so, they exposed
not just a reduced military capability, but also far worse, a lack of will.
This vital fact was not lost on America's potential enemies.

Sensing this weakness, President Vladimir Putin of Russia, who is likely the
continent's most aggressive power player since the Second World War, felt free
to redraw the map of Europe when political events in Ukraine did not go his
way. On the economic front, the crisis has vividly illuminated the differing
interests of the European Union (EU) and the U.S. According to Eurostat, the
EU imported 212 billion euros ($293 billion USD) worth of goods from Russia
in 2012, while the U.S. imported a mere $29 billion. Furthermore, eight of
the EU member nations are in trade surplus with Russia and the adverse trade
balances of the remaining nineteen EU nations are relatively small. The difference
in relative costs between the U.S. and these European nations that would arise
from isolating Russia with major sanctions, let alone military action, are
clear.

Thus far the Western response to his power grab has been underwhelming in
the extreme. The minor financial sanctions placed on Russian oligarchs tied
to Putin's inner circle, and the few guided missile destroyers that have been
deployed to the Black Sea will do little to change the trajectory of the Kremlin.
It should then come as no surprise that Russian pressure on Ukraine did not
stop with its fast motion annexation of Crimea, but has been steadily increasing
in the last few weeks. In early April, cities throughout eastern Ukraine experienced
the occupation of government buildings and police stations by 'unidentified'
protestors, whom many suspect are Russian special forces in plain clothes.
By mid-April, speculation was rife that Ukraine might be headed for civil war,
providing an excuse for Russian intervention to 'keep the peace' and, like
Hitler in the late 1930's, to protect his own countrymen living in a bordering
nation.

In Iraq and Afghanistan, the U.S. and its NATO Allies squandered large quantities
of blood and treasure in fruitless experiments to alter the political and sociological
realities of the Muslim world. However, in the Ukraine, which yearned for western-style
democracy, the West offered merely money and rations. In doing so, they eroded
drastically the age-old force multiplier of international prestige.

President Putin appears set on a clear strategy to re-colonize Russia's old
'empire' by means of so-called salami tactics in which he takes small slices
of territory too minor to spark a conflict. But the slices ultimately pile
high enough to provide a satisfying meal. If Putin's victory in the Crimea
is followed by success in the Ukraine, his next targets likely will be the
so-called 'Baltics' of Estonia, Latvia and Lithuania. All of which are NATO
countries possessing the guarantee of mutual defense from other NATO members
including the U.S., UK, Canada and Germany. The potential for Putin to prove
false this myth of guaranteed defense could usher the world into a world of
much higher uncertainty.

On the other side of the globe, China is building its military, exerting increasing
influence and extending its territorial claims in the eastern Pacific. Worse
still, China and Russia appear intent on destroying the U.S. dollar's privileged
role as the international Reserve currency. Any major loss of this role could
threaten severe declines for the U.S. dollar and spikes in U.S. interest rates.
In short, a loss of U.S. dollar's Reserve status would create a sudden and
massive strategic change in a world to which entire populations have grown
accustomed since WWII.

Despite the considerable risks created by the situation in eastern Europe,
most western stock, bond and property markets, fed on massive central bank
fiat liquidity, continue to flirt with new highs. (See an explanation of this
in our latest report Taxed by
Debt) This strikes me as an exercise in whistling past the graveyard. In
the short term, investors may continue to profit from risk-taking in financial
markets. However, as recessionary forces mount, commodity prices can be expected
to drop, even exerting some downward pressure on precious metals. In the longer
term however, as realization that serious threats exist, including the possibility
of armed conflict in continental Europe, precious metals once again may shine
as a safe haven asset.

In the larger picture, much of the geopolitical balance of power that has
been in place for much of the past 25 years will be tested on the banks of
the Black Sea. Investors should take a few minutes from their daily technical
chart analysis to consider these major developments.

John Browne is a Senior Economic Consultant to Euro Pacific Capital.
Opinions expressed are those of the writer, and may or may not reflect those
held by Euro Pacific Capital, or its CEO, Peter Schiff.

John Browne is the Senior Economic Consultant for Euro Pacific
Capital, Inc. Mr. Brown is a distinguished former member of Britain's Parliament
who served on the Treasury Select Committee, as Chairman of the Conservative
Small Business Committee, and as a close associate of then-Prime Minister Margaret
Thatcher. Among his many notable assignments, John served as a principal advisor
to Mrs. Thatcher's government on issues related to the Soviet Union, and was
the first to convince Thatcher of the growing stature of then Agriculture Minister
Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously
pronounced that Gorbachev was a man the West "could do business with." A graduate
of the Royal Military Academy Sandhurst, Britain's version of West Point and
retired British army major, John served as a pilot, parachutist, and communications
specialist in the elite Grenadiers of the Royal Guard.

In addition to careers in British politics and the military,
John has a significant background, spanning some 37 years, in finance and business.
After graduating from the Harvard Business School, John joined the New York
firm of Morgan Stanley & Co as an investment banker. He has also worked
with such firms as Barclays Bank and Citigroup. During his career he has served
on the boards of numerous banks and international corporations, with a special
interest in venture capital. He is a frequent guest on CNBC's Kudlow & Co.
and the former editor of NewsMax Media's Financial Intelligence Report and
Moneynews.com. He holds FINRA series 7 & 63 licenses.